Should I be a sole trader or a limited company?

Rootlet

Wed, 04 Nov 2026

If you're starting a business on your own in the UK, the usual choice is between being a sole trader and setting up a limited company. Being a sole trader is the simplest way to start. A limited company keeps the business's debts separate from you, but brings more tax paperwork, legal duties and a public record. Neither is right for everyone, and you can change later.

The short answer

• A sole trader is simpler and cheaper to run: register for Self Assessment, keep records and send one tax return a year.
• A limited company separates the business from you, but adds yearly filings, director duties and your details on a public register.
• A company isn't automatically cheaper on tax. It depends on your profits, what you take out and your other income.
• You can switch later, so starting simple and forming a company as the business grows is a perfectly normal route.

What a sole trader is

A sole trader runs their own business as a self-employed person. There's no separate legal "business": you make the decisions, keep the profits after tax, and owe the business's debts yourself. You can start trading without registering first, but GOV.UK says you must register for Self Assessment if you earn more than £1,000 in a tax year (6 April to 5 April).

What a limited company is

A limited company is legally separate from the people who own and run it. You set it up by registering ("incorporating") it with Companies House, and it can own things, sign contracts and owe money in its own name. Its owners are shareholders and the people who run it are directors; in a small company, one person is often both. It needs at least one director aged 16 or over, at least one shareholder and a registered office address. The company's money belongs to the company, so you take it out in set ways, such as a salary or dividends.

Liability: who is responsible for the debts

GOV.UK's guide to choosing a business structure puts it simply: a sole trader is personally responsible for all the business's debts, while a company owner's responsibility is limited to the value of their investment.

That protection has limits. A lender or landlord may ask a director for a personal guarantee. Directors who don't meet their duties can be fined, prosecuted or disqualified. And whichever structure you choose, you may still need business insurance.

How you're taxed

These are the general rules, with GOV.UK figures for the 2026 to 2027 tax year.

As a sole trader

You pay Income Tax and National Insurance on your profit (income minus allowable expenses), reported on a Self Assessment tax return.

• Income Tax: the standard Personal Allowance is £12,570, then the basic rate is 20% up to £50,270 and the higher rate 40% from there up to £125,140 in England, Wales and Northern Ireland. Scotland has different bands.
• National Insurance: GOV.UK's self-employed National Insurance rates are Class 4 at 6% on profits between £12,570 and £50,270 and 2% above that. With profits of £7,105 or more, Class 2 is treated as paid to protect your National Insurance record.
• Trading allowance: if your gross trading income is £1,000 or less in a tax year, you usually don't need to tell HMRC.
• Registering: tell HMRC by 5 October after the end of the tax year you start in. If you start in the 2026 to 2027 tax year, which ends on 5 April 2027, that's 5 October 2027.

As a limited company

The company pays Corporation Tax on its profits. For the financial year starting 1 April 2026, GOV.UK's Corporation Tax rates are 19% on profits of £50,000 or less and 25% on profits over £250,000, with Marginal Relief possible in between.

You then pay personal tax on what you take out:

• Salary: the company registers as an employer and runs payroll, taking off Income Tax and National Insurance, and employer's National Insurance can be due too. Salary counts as a business cost for the company.
• Dividends: payments to shareholders from profits. A company can't pay out more than its available profits, and dividends don't reduce its Corporation Tax. Each one is declared at a directors' meeting, minuted and given a voucher, even if you're the only director.

GOV.UK's page on tax on dividends gives a £500 dividend allowance for 2026 to 2027, then rates of 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate). Dividends above your unused Personal Allowance and the dividend allowance must be reported to HMRC.

Because profit is taxed in the company and again when you take it out, there's no simple "company saves tax" rule: your profit, what you need to live on and your accountant's fees all change the answer.

The admin each one involves

Company deadlines are fixed. First accounts are due 21 months after registering with Companies House, then 9 months after each financial year ends. Corporation Tax is due 9 months and 1 day after the accounting period ends, and the Company Tax Return 12 months after. The confirmation statement, which checks the details Companies House holds, is due at least every 12 months and costs £50 online or £110 by post.

As a director, you're legally responsible for keeping company records, filing the accounts and tax return, paying Corporation Tax and following the company's rules (its articles of association). An accountant can do the work, but the responsibility stays with you.

Privacy: what goes on the public register

A sole trader's figures stay between them and HMRC. A company's don't. Directors' names and personal information are public on the Companies House register, along with a service address. If that's your home address, you can ask for it to be removed, or use a different service address from the start. Anyone can look a company up free and see its officers and the documents it has filed, including its accounts.

What it costs

Registering as a sole trader is free; your main costs are your time and an accountant if you want one. A company adds the Companies House registration fee, the confirmation statement fee each year, payroll if you take a salary, and in practice an accountant's fees for the accounts and Company Tax Return. Take these running costs off any tax saving before you compare.

How people often decide

There's no single rule, but these questions help:

1. How much risk does the work carry? If a mistake or bad debt could cost more than you could cover personally, a company's separation matters more.
2. What profit do you expect? At small profits, a company's extra costs can outweigh any tax difference. As profits grow, ask an accountant to run the numbers both ways.
3. Will you leave money in the business? A sole trader is taxed on all the profit, taken or not; a company pays Corporation Tax on profit it keeps.
4. Will you keep up with the admin and accept the public record?
5. What do your clients expect? If a client asks you to work through a company, that may decide it.

When switching later makes sense

Good moments to look again are when profits rise, when you take on bigger contracts or more risk, or when clients start asking for a company. To switch, you register a company and close the sole trader side: GOV.UK's guide to stopping being self-employed says you must tell HMRC and send a final tax return. VAT, payroll, contracts and bank accounts need sorting too, so involve an accountant.

VAT is a separate decision

Your structure doesn't decide whether you charge VAT; your taxable turnover does. You must register for VAT if it has gone over £90,000 in the last 12 months, or you expect it to in the next 30 days. You can also register voluntarily below that.

What about a partnership?

If you're starting with someone else, an ordinary partnership is the shared version of being a sole trader. GOV.UK's guide to setting up a business partnership explains that partners personally share responsibility for the business, each pays tax on their share of the profits, and a nominated partner handles the tax returns and records. Limited liability partnerships (LLPs) have their own rules. Put a written agreement in place either way.

When to get an accountant

You don't need one to be a sole trader. Advice is worth paying for when you're comparing both structures with real figures, about to switch, have other income such as a job, or are going into business with a partner. Ask for their fees for both structures, so they're part of your comparison.

This is general information, not tax or legal advice. Rates and thresholds change, so check GOV.UK and speak to an accountant about your own situation.

If you're just starting, our Starting a Business in the UK course takes you from idea to first customers, with lessons on choosing between sole trader, partnership and limited company, registering with HMRC and Companies House, pricing, cash flow, tax basics and paying yourself. It's 52 written lessons with a practice pack of planners and checklists in every section. If you go the sole trader route, our Bookkeeping for Beginners course and Self Assessment Tax Returns course cover your records and tax return.